ARE YOU IN A DEBT TRAP?
Debt servicing ratio
·
The debt servicing ratio measures a borrower’s
ability to repay his loans.
·
It is derived by dividing your monthly loan
repayments by your monthly net income.
·
The lower the figure, the better it is.
·
If the figure is higher than 0.5, you could be
headed for a debt trap.
·
You are on
safe ground if
o You’re
repaying loans less than10% of your income.
o You’re
repaying non-mortgage loans less than 10% of your income.
o You
never roll over your credit card bill and pay the entire amount.
o You’ve
never missed an EMI or credit card payment in the past one year.
o You’re
not worried about EMI or credit card payment due to sufficient bank account.
o You
stop using credit cards till your finances are stable.
o You
consider a credit card only as cash-less convenience and not a necessity.
o You
take a loan only on the basis of your present income.
o You
know exactly when your loans will end by chalking out a repayment strategy.
·
You are safe
for now if
o You’re
repaying loans of 11-25% of your income.
o You’re
repaying non-mortgage loans of 11-17% of your income.
o You
roll over your credit card bill once or twice in a year.
o You’ve
missed EMI and credit card payments just once or twice in the past one year.
o You
check the account balance for EMI or credit card payment just in case it falls
short.
o You
take a loan to settle a credit card bill when unable to pay, and cut your
expenses.
o You
consider a credit card as a useful means for online purchases.
o You
take a loan on the basis of your present income and value of investments.
o You
have some idea about how you will repay your loans.
·
You are on
the borderline of a debt trap if
o You’re
repaying loans of 26-44% of your income.
o You’re
repaying non-mortgage loans of 18-24% of your income.
o You
roll over your credit card bill very often, about 3-4 times in a year.
o You’ve
missed EMI and credit card payments 3-4 times in the past one year.
o You
arrange the money to ensure EMI or credit card payment when it is due.
o You
pay the minimum amount required to be paid in a credit card bill.
o You
consider a credit card as a big help when you are short on money.
o You
take a loan by assuming a 10% pay hike, but not on your investments.
o You
are not very sure about how you will repay your loans, and need some effort.
·
You are in a total debt trap if
o You’re
repaying loans over 45% of your income.
o You’re
repaying non-mortgage loans over25% of your income.
o You
roll over your credit card bill almost every month.
o You’ve
been warned by the bank for frequently missing EMI and credit card payments in
the past one year.
o You
find it difficult to arrange money for EMI or credit card payment and end up
borrowing to pay them.
o You
transfer the balance of a credit card bill to another card when unable to pay.
o You
use a credit card as a means to spend freely without a worry.
o You
take a loan by assuming a 20% pay hike and big rise in value of your
investments.
o You
are totally clueless about how you will repay your loans.